icity of demand will tend to be low. D) price elasticity of supply will tend to
ID: 1123026 • Letter: I
Question
icity of demand will tend to be low. D) price elasticity of supply will tend to be high. E) price elasticity of supply will tend to be low 4.3 There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption. Assume for simplicity that all bottled soft drinks are the same size. Suppose the initial market equilibrium is p = $2.00 and Q-1000. 3.00 2.s0 2.60 t-0.60 2.20 2.00 1.80 1.60 1.20 1.00 100 200 300 400 500 600 700 s00 900 1000 1100 1200 Bottles of Soft Drinks per Day Suppose the government imposes a tax of S0.60 per soft drink purchased. The change in total expenditure on soft drinks is A) a decrease of $80. B) a decrease of $160 C) an increase of $320. D) an increase of $480. E) No change in total expenditure.Explanation / Answer
Answer - A) A decrease of $80.
Total expenditure before tax was imposed = Initial demand * price = 1000*$2 = $2000
As seen in the graph 1000 bottles were purchased and price per bottle was $2.
After imposition of tax, total expenditure =New Demand * New price = 800 * $2.40 = $1920
After imposition of tax demand curve has shifted to left and new demand is 800 bottles and price has increased to $2.40 per bottle.
Thus difference in total expenditure = 2000-1920 = $80.
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